FICO scores are a banks way of determining your creditworthiness and the interest rate you will pay on loan. Lenders make a good part of the decision on lending you money by your FICO score, so it is a good idea to know what goes into your score. What are some things you need to know about your FICO score?
How can a FICO score affect your interest rate?
As many factors will determine what you pay on loan, it is safe to say that your FICO score is one of the biggest ones. According to Scott Sheldon, who wrote an article on Zillow.com, about a few scenarios related to FICO scores, he presented the following information.
A $300,000 home with a 5% down/equity (a 95% loan-to-value ratio) with a conventional mortgage on a primary residence and a 740 FICO score, a Mortgage rate of 3.625% with no points would yield interest paid on a loan of 360 months at $182,909.
With the same exact scenario with one exception, a 700 FICO score, you would end up paying a higher interest rate of 3.875 and paying $197,463.
With these two different examples, you can see that with just a slightly lower FICO score you can end up paying quite a bit more for a home, especially over a 360 month period.
What kind of credit score do you need to get a house?
As most people want to know the exact score it takes to get into a home, it will vary on the kind of loan you do. There is no hard cap, but there are some general guidelines.
On Conventional Mortgage Loans, you should have a credit score of at least 620.
On an FHA Mortgage: 580
On a VA Loan: there is no minimum required, but they suggest that you have a 620 score or higher.
While meeting a minimum is right, it is better to have a higher score, because the higher your score, the less you will pay in interest.
Conventional mortgages are the most typical loans that people get. They usually require a higher credit score, but with that, you are required to pay less of a down payment and get lower interest rates. Fannie Mae and Freddie Mac set the standards of a conventional mortgage. Fannie Mae and Freddie Mac are government-sponsored enterprises that are privately owned but receive support from the government. The government does not ensure conventional loans.
The government backs FHA Loans. A branch called the Federal Housing Administration is responsible for FHA loans. Because the government supports them, they are easier to get than a conventional loan, because they require a lower FICO score. They don’t expect as high of a down payment, and you can refinance on a significant amount of the equity of the home.
Your FICO score is an essential part of home buying and getting the right loan for you. Improve your FICO score you can get the best possible loan.